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Not All Dividend ETFs Are Created Equal

The common dividend label belies what is a diverse array of equity-income strategies.

Ben Johnson, 04/01/2015

Exchange-traded products, or ETPs, that are labeled with the "dividend-screened/weighted" attribute within our strategic-beta taxonomy represent the largest contingent of this universe as measured by assets under management. As of the end of February, these ETPs collectively held $134 billion of investors' assets. This represents 31% of the $434 billion in the broader strategic-beta grouping.

This category has been growing at a blistering pace in recent years. Over the trailing decade, dividend-oriented ETPs have attracted nearly $101 billion in new assets (see Exhibit 1 below).

This should come as little surprise in the context of the prevailing interest-rate regime and the secular uptrend in demand for sources of investment income as the first waves of baby boomers enter retirement.

Asset managers have taken notice, and product proliferation is in full swing. Of the 99 dividend-screened/weighted ETPs that exist today, more than half are less than five years old (see Exhibit 2 below). As the menu of dividend-oriented ETPs expands, it is important that investors understand that not all dividend ETPs are created equal. Each has its own unique characteristics, which stem from important--albeit often nuanced--differences in the methodologies of their underlying benchmarks. Understanding three key characteristics of these funds (which all spring forth from differences in their benchmarks' construction) can help investors to make more informed choices. These three characteristics are: 1) dividend yield, 2) dividend growth, and 3) dividend sustainability.

Dividend Yield
A fund's current dividend yield is often the first metric that investors seek out when shopping for equity-income opportunities. The 12-month-yield metric aggregates an ETP's distributions over the trailing 12-month period and then divides that figure by the fund's net asset value. While this metric is interesting, it is not very useful in isolation. This is because it lacks context.

Framing a fund's 12-month yield in the context of its historical values and relative to the current and historical values for comparable strategies provides useful context. For example, in Exhibit 3 below I've plotted the monthly 12-month yields for those dividend exchange-traded funds that invest in U.S. large caps and whose inception was prior to 2007. I've also included SPDR S&P 500 ETF SPY as a point of reference.

Ben Johnson is Morningstar’s Director of European ETF Research.

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